According to the Zhitong Finance APP, gf sec has released a research report stating that according to Wind, the eco-friendly sector had a net cash outflow of 38.5 billion yuan in investment from Q1 to Q3 of 2024 (down 13.6% year-on-year), among which, the free cash flow from solid waste and water affairs turned positive. Since October, the efforts to alleviate debt have been increasing continuously, which is an important indicator for next year. In addition to the "6+4" trillion debt relief efforts, greater emphasis should be placed on the central government's rolling debt relief and the ongoing policy enhancement in 2025. It is recommended to focus on the three directions of rolling debt relief, emerging fields, and undervalued operating assets. Currently, the main factor suppressing the valuation of the eco-friendly sector is the uncertainty of project repayments. If the "debt relief" policy is implemented to accelerate the repayment progress of projects, the existing operating assets in the eco-friendly sector are likely to welcome a repricing of value.

GF Securities' main points are as follows:

A review of 2024 - Breaking biases, the "utility-ization" of operating assets.

A review of the sector's performance in the first three quarters: Operating assets have become mainstream. According to Wind, the profits from solid waste and water affairs accounted for 67% of the sector's profits from Q1 to Q3 of 2024, an increase of 18 percentage points compared to 2019; investment contraction and improved cash flow. According to Wind, the eco-friendly sector had a net cash outflow of 38.5 billion yuan in investment from Q1 to Q3 of 2024 (down 13.6% year-on-year), among which the free cash flow from solid waste and water affairs turned positive; dividends have continued to increase, with companies like conch venture and grandblue environment raising their dividends. Companies with stable profits and strong dividend potential that were overlooked during the high growth era, such as solid waste and water affairs assets within the eco-friendly operating assets, deserve special attention. Coupled with price adjustments and debt relief policies, the current valuation reflects outstanding cost-effectiveness.

Prospects for 2025 - Policy enhancement, rolling debt relief, and recovery of development.

Since October, the efforts to alleviate debt have been increasing continuously, which is an important indicator for next year. In addition to the "6+4" trillion debt relief efforts, more attention should be paid to the central government's rolling debt relief and the continued strengthening of policies, driving relevant subjects to cycle and restore confidence in development. Looking back at the debt relief process from 2014 to 2017, the initial policies for debt relief were just the beginning, and the policy combination aimed at promoting development is the key. So far, we have seen accelerated issuance of appliance dismantling subsidies and national subsidies for waste incineration, as well as policies to stimulate domestic demand for biodiesel and recycling, all of which have been implemented, making next year even more promising.

Investment Idea One: The driving force of rolling debt, initiating active transformation.

It is expected that in this round of debt transformation, state-owned central enterprise listed platforms will still play an important role, especially under the backdrop of state-owned enterprise reform, with the potential to achieve active transformation through means such as mergers and acquisitions, repurchase and shareholding, stock-based incentives, business transformation, asset securitization, and reits. Focus on (1) state-owned central enterprises that entered in 2018 and 2019 but have a significant drop in market cap; (2) companies that are below net asset value with declining performance and a strong need for reform; (3) companies where shareholders own quality assets and have development potential. It is recommended to pay attention to wuhan sanzhen industry holding (600168.SH), nanfang zhongjin environment (300145.SZ), guangxi nanning waterworks (601368.SH), central plains environment protection (000544.SZ), city development environment (000885.SZ), etc.

Investment Idea Two: Emerging fields are thriving, with debt transformation accelerating the reversal of difficulties.

In this "debt transformation," after improving the existing PPP distressed projects, focus on companies whose core business is expected to develop steadily: (1) focused photonics (300203.SZ): the second curve focuses on high-end scientific & technical instruments mass spectrometers, which has become the domestic leader in mass spectrometer localization; (2) greentech environmental co., ltd. (688466.SH): leader in recycled water and drinking water membrane treatment, has innovatively launched the "new water island" integrated equipment, actively laying out in photovoltaic and other fields; (3) langkun environment (301305.SZ), signs (688480.SH), mei'ai technology (688376.SH), and other companies with potential for performance growth.

Investment Idea Three: Undervalued operational assets, expecting a Davis double effect.

At present, the main factor suppressing the valuation of the eco-friendly concept sector comes from the uncertainty of project payment. If the "debt transformation" policy accelerates the progress of project payments, existing operational assets in the eco-friendly concept sector are expected to undergo a value reassessment, with a focus on solid waste and water affairs operation companies that have outstanding valuation-to-price ratios. Pay attention to grandblue environment (600323.SH), eb environment (00257), conch venture (00586), chongqing sanfeng environment group corp. (601827.SH), jiangxi hongcheng environment (600461.SH), bj ent water (00371), yongxing shares (601033.SH), etc.

Risk Notice: Policy change risk, dividend rate less than expected risk, delayed payment risk.